7/01/2004

President Bush Extends Sanctions on IRAN for Another Year; IAEA Investigating Nuclear Weapons Program

In late June 2004, U.S. Secretary of State Colin Powell suggested that Iran may face U.N. economic sanctions if its government fails to prove that it is not pursuing a nuclear weapons program. In mid-June 2004, the International Atomic Energy Agency (IAEA), which oversees the Nuclear Non-Proliferation Treaty, adopted a resolution urging Iran to cooperate with ongoing investigations and urged Iran to build a heavy-water reactor rather than a uranium conversion facility (that can produce weapons-grade materials). The IAEA is scheduled to meet again in September 2004, to discuss appropriate action concerning Iran. The June 2004 IAEA resolution followed a statement from Iran's Supreme leader, Ayatollah Ali Khamenei, that although Iran was not seeking nuclear weapons, it nonetheless would not give up its uranium enrichment program in accordance with the Non-Proliferation Treaty.

The United States has maintained various sanctions against Iran since 1979, following the seizure of the U.S. embassy in Tehran, on November 4 of that year. In March 2003, President Bush extended sanctions originally imposed in 1995 for another year, citing Iran's "support for international terrorism, efforts to undermine the Middle East peace process, and acquisition of weapons of mass destruction." In March and May 1995, President Clinton had signed two Executive Orders prohibiting U.S. companies and their foreign subsidiaries from conducting business with Iran. Executive Order 12957 specifically banned any "contract for the financing of the development of petroleum resources located in Iran."

In August 1996, the Iran-Libya Sanctions Act (ILSA) was passed unanimously by the U.S. Congress and signed into law by President Clinton. ILSA provided for the imposition of sanctions on companies, irrespective of their corporate "nationality," that invest more than $20 million annually (in August 1997, this was lowered from $40 million) in the Iranian oil and gas sectors. ILSA's initial five-year term expired in August 2001, and many U.S. energy firms pressed for non-renewal of the sanctions. Energy companies were encouraged by the March 2000, U.S. decision to permit the importation of certain Iranian products -- carpets, caviar, pistachios, and dried fruit - - as an exception to the general prohibition on the importation of Iranian goods. However, in late July 2001, the U.S. Congress voted overwhelmingly to renew ILSA for five more years, and President Bush signed the bill into law. Since 2000, the only relaxation of Iranian sanctions followed the December 2003 earthquake in Bam. In response to that event, the United States temporarily suspended sanctions against the export of humanitarian items and money transfers to Iran. In March 2004, the selective suspension was extended for an additional three months.

As a result of the March 1995 Executive Order (but prior to the enactment of ILSA), U.S.-based Conoco was obligated to withdraw from a $550 million contract to develop Iran's offshore Sirri A and E oil and gas fields. On August 19, 1997, President Clinton signed Executive Order 13059 reaffirming that virtually all trade and investment activities by U.S. citizens in Iran were prohibited.

The concept that under ILSA legislation, the United States could seek to penalize foreign companies for investing in Iran, has run into opposition from a number of foreign governments. To date, Iran has attracted an estimated $30 billion in foreign investment in its petroleum sector since ILSA was enacted. The European Union (EU) opposes the application of ILSA sanctions to companies in member countries, and on November 22, 1996 passed resolution 2271 directing EU companies not to comply with ILSA. Although ILSA sanctions have not thus far been imposed, the threat of such sanctions has also deterred some multinationals from investing in Iran. U.S. Secretary of State Madeleine K. Albright noted that U.S. efforts to discourage the Indonesian firm Bakrie from proceeding with the development of the Balal oilfield contributed to Bakrie's apparent decision to withdraw, although the impact of the Asian financial crisis was also important.

In May 1998, a consortium led by TotalFinaElf (France), Gazprom (Russia), and Petronas (Malaysia), which is working on development phases two and three of Iran's South Pars gas field, was granted a waiver under Section 9(c) of ILSA by the United States. U.S. Secretary of State Madeleine K. Albright noted that the United States had concluded that sanctions would not prevent this project from proceeding, and stated that the waiver was also granted because of the enhanced cooperation achieved between the United States, the EU, and Russia in accomplishing ILSA's primary objective of inhibiting Iran's ability to develop weapons of mass destruction and support of terrorism.

Meanwhile, in July 2000, the U.S. State Department announced that it would consider sanctions against Italy's Eni after that company signed a $3.8 billion deal for the South Pars fourth and fifth development phases. Despite ILSA, in July 2001, Italy's Eni signed a nearly $1 billion, 5 1/2-year buy-back deal to develop the 3-5 billion-barrel Darkhovein onshore oilfield. Also, as of July 2002, Australia's BHP Billiton Ltd. reportedly was considering whether or not to participate in a project to develop the Foroozan-Esfandiar oilfields (this project was eventually awarded to an Iranian firm). In May 2002, the United States announced that it would review a contract by Canada's Sheer Energy to develop an Iranian oilfield to determine whether or not it violates ILSA. To date, no action has been taken on this matter.

Total and Malaysia's Petronas were chosen by Iran to undertake the Sirri A and E oil and gas field project after Conoco was required to withdraw in 1995. The two firms then proceeded to develop the project. Total did not violate ILSA sanctions for the Sirri project despite the $600 million size of this investment because the deal was signed prior to ILSA's August 1996 enactment. Petronas, which acquired a 30% stake in the Sirri deal in 1996, stated in early March 1998 that it would not withdraw from the project despite U.S. objections.

In September 2000, the U.S. Treasury Department announced that it was investigating Conoco to determine whether or not the company had violated U.S. sanctions in helping to analyze information on the field collected by the National Iranian Oil Company (NIOC) regarding the enormous, 26-billion-barrel Azadegan oilfield (the largest oil discovery in Iran in many years). Conoco has denied that it circumvented sanctions, although it has also stated that it remains interested in helping develop Azadegan when sanctions are lifted (ExxonMobil has also expressed interest). On November 1, 2000, Iran granted Japan first negotiating rights over Azadegan, and on November 1, 2000, agreement was reached between Japan and Iran for Japanese firms (Japex and Indonesia Petroleum, both majority-owned at the time by the Japan National Oil Company -- JNOC) to have priority negotiating rights to develop the field. In January 2001, the Majlis (Iranian Parliament) approved development of Azadegan by foreign investors using the so-called "buyback" model. Although negotiations stalled through 2003, a $2 billion agreement was signed early in 2004. Most recently, a wave of activity relating to the Caspian Sea region has increased Iran's ability to engage in oil "swap" transactions. In 2004, PetroKhazakstan and Russia's U.S.-listed Lukoil made exploration bids on Iranian oil blocks.